The yield on 10-year US Treasuries last week touched 5.35%, its highest level since 2002. It is one of the most powerful figures in the world.
When most people think about global markets, they picture flashing stock prices, Wall Street traders shouting into phones or the latest drama involving a tech billionaire. Very few wake up wondering what US Treasuries did overnight — or even what they are and what they do. They should.
If I had to choose one number that influences your retirement savings, your mortgage rate, the rand in your wallet and even what the Reserve Bank does next, it would be that one.
The bond market has a reputation for being boring. Unfortunately for all of us, it is also the market that sets the price of everything else.
What a Treasury bond is
Imagine the US government needs to borrow money. Instead of walking into a bank and applying for a loan, it issues bonds. Investors lend money to the government and, in return, receive interest payments and their money back at a future date. Nothing particularly exciting there.
What makes US government bonds special is who the borrower is — the world’s largest economy and the largest issuer of sovereign debt. For decades, investors have viewed them as the closest thing markets have to a risk-free asset, because the chance that the US fails to repay its debt is considered exceptionally low.
The most important number in finance
Investment professionals often refer to Treasury yields as the “risk-free rate”. If an investor can earn 5% by lending money to the US government, why would they invest in something riskier unless they expect a higher return? They wouldn’t.
That means every other investment in the world has to compete with Treasury yields. South African government bonds, listed property, equities, private equity, infrastructure projects and emerging markets all need to offer a higher expected return to justify their additional risk.
In finance, we call this the “hurdle rate”. When Treasury yields rise, the hurdle rises for everyone.
Why markets get nervous when yields rise
For much of the period after the global financial crisis, interest rates and bond yields were unusually low, with the US 10-year yield sitting at around 2%. Investors searching for returns were pushed further out on the risk spectrum into shares, property, private markets and emerging economies.
Today, the picture looks very different, and this is where the numbers can be deceptive. Moving from 2% to 5% doesn’t seem dramatic at first. But when the return available from the world’s benchmark risk-free asset more than doubles, investors start reassessing what they’re willing to pay for everything else.
In a 1999 article in Fortune, Warren Buffett wrote that interest rates act on financial valuations the way gravity acts on matter. The higher the return available on safe assets, the harder it becomes for riskier assets to justify expensive valuations. That’s why bond market moves hit share markets so hard.
The bond market is the market that tells the stock market what to do.
Why it matters here
Money has a passport. Capital moves around the world looking for the best risk-adjusted return.
When investors can earn attractive yields from US government bonds, they demand more compensation before investing in riskier markets, South Africa among them. When global money flows back towards dollar-denominated assets, the rand tends to come under pressure.
That is where it reaches your wallet. South Africa imports a large share of its inflation. We buy oil in dollars and import machinery, technology and manufactured goods. When the rand weakens, those imports become more expensive. When oil prices rise at the same time, the hit to inflation is bigger.
Most South Africans think of the rand as a report card on how the country is doing. Economists think of it as one of the channels through which inflation enters the economy.
What it means for your bond
Many South Africans had hoped for interest rate relief. Instead, the Bank has raised its reference rate twice this year: to 7% in May, its first hike since 2023, and to 7.25% on September 23. That took prime to 10.75%. The Bank meets again in November.
On a R1m, 20-year home loan at prime, those two hikes add about R336 to the monthly repayment.
If US yields keep rising and the rand weakens, inflation risks increase and the pressure on interest rates is upwards.
Higher South African interest rates can help support the rand. When US rates rise, the gap between what investors earn here and in the US narrows — and that gap is their reward for the extra risk of an economy like ours. Keeping it wide keeps foreign capital coming.
The Bank can’t control the oil price and it can’t determine what happens in Washington. But it can influence one side of South Africa’s imported inflation equation by helping maintain confidence in the currency.
And if investors can earn more than 5% from the US government, they will expect a much better return before taking on the currency, economic and political risk of lending to South Africa. South Africa’s 10-year government bond already yields close to 9%. That is one reason South African bond yields tend to move in the same direction as US Treasury yields.
The bond market’s hidden influence
The bond market rarely enjoys the spotlight, yet bond yields affect government borrowing costs, corporate loans, mortgage rates, exchange rates, asset valuations and investment returns.
They are, in effect, the price of money itself. When the price of money changes, everything else eventually adjusts.
The stock market may be the theatre of global finance, but the bond market is the plumbing behind the walls. It’s not particularly exciting until something breaks, and when it does, everyone notices. With the US Federal Reserve signalling further hikes, the pipes are under strain.
Reuvers is MD of WealthStrat, the investment business of Chartered Wealth Solutions.
